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5 tips for finding financing with the right investors

Companies are under the microscope from the moment they attract a key investor. “Potential investors are making assessments and determinations throughout the whole process—not just right at the start,” RoseRyan director Stephen Ambler warned during a recent webinar. “You’re under the spotlight for quite a period of time,” he added.

For private companies on the funding hunt, their quest is especially tough during the early stages of searching for investors and the process for connecting with them and winning them over. It’s an infrequent occurrence for the team involved, who has to pull their attention from their day-to-day work. And it’s a process that’s rife for possible setbacks as a mismatch could add to the time the company has to wait for much-needed funding.

Here are just a few of the tips Stephen offered in his webinar:

1. Start early.

A last-minute, desperate search is more likely to lead to a bad deal—or no deal at all. Securing financing can take a long time, between three and six months. Build in time to both prepare your company to find the right investor (or a few—as a deal may fall apart), and undergo detailed scrutiny when you do.

2. Get your house and business plan in order, and be prepared for an open conversation.

You should have both up-to-date documentation and your business plan for the next two to three years in place. Not only do you want to show you have good records, but you want to show potential investors a plan, with support, that is attractive, realistic and achievable. They won’t invest unless they see that.

You also need to lay out any dirt you have for possible inspection. No one expects a perfect world, so be open and honest. Investors will not be pleased to find out about a lawsuit after they’ve agreed to work with you. Potential investors want to know where the possible holes are in your business, and they want to be fully aware of any reputational risks they’re taking on once they sign the dotted line. “No investor wants their name in lights,” Stephen said.

3. Seek out the perfect match.

Many investors will only go with companies that fit within the boundaries they have set up for themselves. They might consider only late-stage companies, for instance, or companies that are in a particular industry or already have a rigid exit plan.

Fortunately, many investors explain their parameters right on their website. You can also ask around, to your current investors, board members and trusted advisors, for recommendations. A warm introduction is ideal—cold calling around for your next investor will be time consuming and is less likely to be effective.

4. Make a good first impression.

Professionalism goes a long way with investors who want assurance that your company is on the up-and-up. That first meetup is where the first impression truly counts. A company once called Stephen for help in frustration that they couldn’t get financing. Part of the problem: They had a habit of dulling investors with over two hours of slides. Nearly 60 pages, in fact!

“Your key facts should not read like War and Peace,” Stephen said. “No one wants to see that—it sends a bad signal.”

In just 15 professionally designed slides, you can fit in essential details while showing off the passion the team has for the company, its mission and prospects.

5. Be ready for an onslaught of scrutiny.

If investors are interested, that’s when the real questions will begin as they conduct their due diligence. This is where any prep work you did ahead of time can help tremendously.

Investors want to see key metrics to fully understand how the business is managed and whether they can stand behind it. In addition, you will need basic information that’s up to date and at the ready to keep the potential deal on track—including management accounts, revenue by product, receivables and payables.

Talk about a huge undertaking! Finding and securing investors consumes more time than many executives new to the process realize. They can save some valuable time and increase their chances of making a promising investor match by checking in with trusted advisors who have helped with similar deals and are on top of the trends in the investment community.

The right investor could be just around the corner—you just need to know how to find and keep their interest.

What happens after you find the right investor? Listen to the online webinar “Attracting Funding: What Does an Investor Look For?” at your convenience to hear Stephen’s advice before signing the term sheet and learn important tips about what investors look for as they scrutinize potential investments. This event was originally broadcast on December 15, 2016 and was hosted by Breakaway Funding.

Stephen Ambler is a director at RoseRyan, where he oversees the CFO practice area and handles client CFO requests. He has over 30 years of experience helping a wide range of companies with their financing needs. His interim CFO stints at RoseRyan have included a social media company and the management of the financial integration process at a company acquired by Oracle. He previously held the CFO position for 13 years at NASDAQ-listed companies.

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Going dark: What it means and why it might be a smart move for your company

What happens if your public company decides to “go dark”? If you are in the military or in covert operations of some sort, this slang term means you have ceased all forms of communication—probably to save your life. Teenagers can sometimes go dark. If your teenage son or daughter is not responding to your phone calls, texts, tweets, and any other way you to try to communicate, they’ve gone dark. You may feel snubbed and left out. But consider the positive aspect: This quiet period is actually part of their development. They are establishing their independence. Are they using their time wisely? That is what needs to be determined.

For publicly traded companies, going dark means they are delisting from an exchange (e.g., NASDAQ) and simultaneously deregistering with the Securities and Exchange Commission. In this age of transparency, going dark may not seem like a smart move. In fact, it might be just the right move, depending on the company’s objectives. Returning to the teenager example, you need to know—is your company using its time wisely?

If you are an investor, business partner or employee of a company that is going dark, pay attention to these areas as you explore the future potential of the business.

Take a closer look. While there are several practical considerations in the decision to “go dark,” the company may also have strategic implications. Review company filings with respect to the process, as well as press releases announcing the decision. These documents are intended to provide information as to the considerations involved in making the decision to go dark. Strategic implications may or may not be evident from the press releases and filings. It pays to take a closer look and see if you notice opportunity behind the ominous sounding development (more about this later).

Review current shareholder listings and changes in shareholdings. You can get this information from periodic SEC filings, including the latest proxy statement. This will tell you if there are major shareholders owning the stock. A little more research may give you some insights on the major shareholders and their plans for the company.

As an example, a major investor might have a strong track record in turnaround situations, or industry consolidation strategies or other strategic moves. Chances are, you will see a concentrated shareholder base, as companies that go dark must have fewer than 300 registered shareholders (an SEC rule). It pays to know who is driving the bus.

Also review company liquidity and capital structure. Once a company has gone dark, it no longer has direct access to the public capital markets. As a practical matter, if it is a small or microcap company, or if it is underperforming its peers, the company may not have access to such markets in any case. This is something to consider if the company has liquidity issues or is undercapitalized. Private equity and debt may or may not be available, and it can get expensive.

Consider whether cost avoidance is a legitimate driver. Publicly traded companies spend a lot of time and money maintaining the standards required by the national stock exchanges and the SEC. The costs easily exceed $500,000 per year for even the smallest of the small cap companies, to include annual audits, quarterly reviews, legal fees, audit committee fees, SOX compliance costs, annual registration fees and increased insurance premiums for director and officer liability. Oftentimes, boards find that the incremental costs of the public listing outweigh the benefits. Companies often site cost savings as a significant factor in going dark. Saving precious capital is a legitimate reason, but it has a downside.

Look into shareholder liquidity. Shareholder liquidity is probably the scariest part of the going dark process. When the company delists from national exchanges, its stock may continue to trade, but liquidity will depend on whether brokers will continue to make a market for the shares. There can be no guarantees. As such, shareholders may find it difficult, expensive and/or at least time consuming to sell the shares. And there may be a very thin market or no market at all. However, as long as there are market makers, the alternative exchanges—the pink sheets, the bulletin boards, etc.—will continue to trade the shares.

See if you will still have access to financial information. Transparency is another possible casualty of going dark. Most companies that deregister follow a practice of posting their periodic financial results either through quarterly press releases or direct posts on their websites. While they are under no obligation to do so, it’s good business practice, and it doesn’t cost much. And many companies continue to maintain a website and provide contact information. While you won’t see a Form 10-Q or Form 10-K or any of the other SEC filings, at least you will see quarterly and annual financial information, and hopefully you will have contact information if you have questions.

Study the strategic intentions. As noted above, there may be strategic reasons a company goes dark. It could be a logical step in taking a company private and could be a part of a bigger plan. Going dark is a relatively low cost exercise, with immediate cost benefits. If the strategy is in fact to “go private,” and your research shows that the major shareholders have a good track record, you could stand to benefit. At some point the majority shareholders and/or the company may be back in the market to cash out minority shareholders. Once again, no guarantees, but it’s something to consider.

Anytime a company goes through a transformative event, it’s wise to turn to experts who have gone through similar situations and can step in to guide the company, based on their past experiences, best practices and what makes the most sense for the business. Going dark is not routine—it’s a vital, transformative time that requires specialized expertise.

Terry Gibson heads up RoseRyan Private Equity to help PE firms extract more value from their portfolio companies. A founder of Steel Partners Corporate Services, he has been focused on serving the PE industry for over 15 years. He was the CEO of CoSine Communications and BNS Holdings, and he oversaw the finances at Calient Networks and served as controller at Lam Research.

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